When a currency pool is too small to have any liquidity to determine effectively its value, I think currency pegging (to a major currency or a basket of currencies) is a more applicable modern concept than "backing" by any arbitrary precocious precious commodity.http://en.wikipedia.org/wiki/Fixed_exchange_rate

When a currency pool is too small to have any liquidity to determine effectively its value, I think currency pegging (to a major currency or a basket of currencies) is a more applicable modern concept than "backing" by any arbitrary precocious commodity.http://en.wikipedia.org/wiki/Fixed_exchange_rate

In the case of BTC, this is all very academic. However, the above makes no sense.

"Precocious" commodity? Commodities cannot act, they are lumps of stuff. These lumps may have value to others in various ways, the value placed by those folks changing from moment to moment.

Who's precocious? That'd be the central bankers behind the issuance of all the major fiat currencies. They may or may not like how this market or that market is acting, and so step in with their heavy dull cudgel of open-market operations to lopsidedly inject more fiat currency into the marketplace, to the loss of all who are not first to get the new money.

Who are central-bankers to decide what the relative value of a thing is? Don't like how the market is acting? The market price is an emergent phenomenon arrived at by the sum total of free and open transactions done by the participants, who wanted to do those transactions at the time, or they would not have taken place.

So what you're really saying is that you don't trust the people who are participating in establishing a commodity's price by transacting in the market for that commodity. You would rather have an expert, the central planner at the central bank, observe and then by his fiat decide what is best for everyone.

As to liquidity, the market solves this (that is to say, in the market this is solved)[1] by volatility. The only correct price is the one printed on the tape. And then only for that instant. If there are too few transactions taking place to keep this stable, then there is opportunity for speculators who believe for their own reasons that the price doesn't reflect the true value in the transaction. The more extreme the swing, the more speculation is attracted until there is enough transacting happening to dampen out the price oscillations.

Lack of liquidity/volatility could be a sign of uncertainty about conditions affecting the transaction, or a lack of interest in the thing being transacted. These are phenomena emergent out of the business actually taking place, and who are you to tell (via a peg) the market's participants what to do?

BTC's value has roughly tracked its popularity and notability. There was a very short spike toward $0.50 USD some time ago, when its popularity and notability were much lower. Lack of liquidity drove that. What happened? Speculators noticed. Most of them (as it happened) decided that the price on the tape couldn't possibly be efficiently reflecting the true worth of BTC at that time, and so just as quickly as it popped up due to lack of available BTC supply, supply soon rushed into the marketplace and cleared out the demand that created the spike.

The market is never wrong, because the market price is merely a report of instantaneous conditions.

[1] Economists are wont to talk about the market as a thing unto itself, capable of its own actions and independent behaviors. This is a mistake. However, phrasing the market in that context is convenient shorthand when what you mean to discuss is really the summation of actions taken by the participants in a market.

Isn't the purpose of Bitcoin what it can do for society as a whole, freeing them / us from from predation, Bitcoins are not the most important issue, shops goods and services are the important points.If people hoard bitcoin in the hope of gains, then there will be no money, so someone will just invent another currency that allows people to do what they want, live free from being fleeced, if hoarders end up in the position of being able to do that, another currency will come along that sets people / society free.People have a right to prosperity, to profit from investment, a little hoarding will always go on, but if every coin mined is simply hoarded then there will be no bitcoin economy, so no shops, goods and services and the masses will not join in.What they want to know is can I buy food and water, clothes for my family in such a way that it's simple quick and easy so they can spend time with their loved ones, if you can give them that, none of them will begrudge you a little profit, you've earned it and deserve it for making their lives better, for giving them more time to spend with their friends and family.Don't think how much are my bitcoins going to be worth tomorrow because if you just hoard them, they wont be worth anything.Only if you put them to use, a create shops and industry, and goods and services will you draw in the masses, and they will only stay if you improve their lives.If currencies like this are to succeeed, especially now as people are worried about hoarding for gain, then there is the very real possibility it will price the public out of the market, so destroying the market.At least a small percentage of a hoard must go back into 'society' opening a business of some sort.That's how you make Bitcoin sucessful, create businesses with it, not by hoarding it.

Could BitCoin ever be backed by Gold or some other commodity in the following fashion? And would it be desirable to do this?Assume for the sake of argument that all 21 million coins were in circulation as of just today. Suppose some rich reputable entity (Bill Gates or the Pope) bought up all bitcoins at market price (29 cents) for $6,090,000. Some amount of gold is purchased, placed in a vault in Switzerland, and the coins are sold back to the public for some amount of money which the market will bear in such a manner that Bill or the Pope take no loss or gain. Does that back the currency so that it is tied to the price of gold, similar to the way that everyone seems to want the US to have stayed on the gold standard?

Clearly I have not thought this through, but is there way to later back a fiat currency, or must it be done from the outset? Further, is it desirable to do this?

IF each transaction incurred a 0.00000001BTC charge, then when a suficient amount has acrued, enough to buy say 1 small coin, this can be held in reserve, over a number of years, Bitcoin will then start to have a solid foundation.In fact this gold silver etc could then be 'redistibuted to anyone, use for charity, furthering the bitcoin community, lots of things you could do with it.Of course it may not need this, and was designed not to, but as an add on it might be of use, raising funds, providing a solid backing, not that it needs it, fiat currency has nothing backing it anyway, and fiat currency sort of work, they are just be used wrongly and for evil intent.